UMG/EMI: A Tax on Innovation

September 19, 2012

Reports today indicate that the European Union will soon issue its official final decision on the proposed merger between the
major labels Universal Music Group and EMI, if UMG divests a substantial
portion of EMI. As Public Knowledge has explained before,
Europe’s review in no way changes the US Federal Trade Commission’s (FTC)
responsibility to examine the merger and protect competition in the US market.

As the FTC continues its review, it must remember that the
consequences of this merger go well beyond higher prices for consumers: it
allows corporate gatekeepers to leverage their large copyright holdings as a
tax on innovation.

This merger, which would hand UMG unprecedented market
power, would result in a wide range of harms. Antitrust authorities should look
at more traditional harms like direct price increases for consumers, but they
must also consider how the merger creates a new tax on innovation for forward-thinking
digital music services.

Many of the harms that this merger threatens (which Public
Knowledge has explained in detail)
stem from the extensive copyright holdings a combined UMG/EMI would own. These
copyrights would give the new super-major label a monopoly over approximately
40% of the music being bought and listened to today. This means that UMG/EMI’s holdings
would be must-have content for any service that wants to let its users listen
to any music they like (think Spotify or the iCloud music locker, or more
importantly, future competitors to Spotify and iCloud).

Post-merger, any person or company that wants to launch a
new music service (particularly ones that let customers choose what they’re
listening to) would need to get the permission of UMG/EMI if they want to include that
40% in their catalog. If UMG/EMI says no, then that service would have no other way to
use their music, unlike online radio services, which can always resort to a statutory license.

This means that the combined UMG/EMI has much more leverage
over the startup music services, and can use that leverage to basically impose
a tax on innovative new music services. This goes beyond simply demanding reasonable
payment: the combined UMG/EMI could make demands that unreasonably burden new
services that also empower independent labels or help DIY artists reach the market.
We’ve seen some of this already happen: in return for giving a license major
labels tend to demand high advance fees (we’re talking hundreds of millions, before the company has even used any
music), ownership stakes in the new company, and royalties disproportionate to the actual pro rata value of the labels’ holdings (squeezing out independent
labels’ share and the startup’s profits at once).

The “tax on innovation” problem is not that music services
would need to pay UMG/EMI, it’s that they would need to agree to payments and
conditions that disproportionately burden anyone who is creating new,
innovative ways for the music industry to meet the demands of its customers.
Meanwhile, UMG/EMI could just sit back, collect its tolls, and rely on its
gatekeeper status to keep the revenue coming in. Any new service that doesn’t
fit into UMG/EMI’s vision for how the music industry should work simply won’t
get licensed at all. This means that UMG/EMI’s market power would decrease innovation and new commercial opportunities in the music business without any countervailing value created by the major labels.

So, post-merger, if you’re an entrepreneur in the music
business and you want to launch a cool new service that connects musicians
directly to fans and responds to the demands of music consumers, you must first
pay your taxes to the new super-UMG. You won’t have much say over what those
taxes are and whether they reflect how much you can pay, but you’ll have to accept
them or give up on your startup altogether. And any independent musicians who
would have been excited to try the service as a new way to earn revenue without
using a major label as the middleman will be out of luck.

UMG has failed to show that this merger would increase its
investment in new services or artists. In fact, the Universal-Polygram and
Sony-BMG mergers taught us that mergers often cut artist rosters by 30-40%.
So this merger would give UMG/EMI the ability to impose a higher tax on the
most innovative new movers in the music industry, without actually contributing
any new value to the business.

The FTC is still reviewing the UMG/EMI merger here in the
US. It is critically important that the FTC’s examination looks beyond the
narrow question of whether Spotify’s subscription fees will increase after the
merger, and recognizes how this merger will create a tax on new digital music
services, which ultimately hurts musicians and their fans.